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1.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10Q
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
or
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-1169
THE TIMKEN COMPANY
(Exact name of registrant as specified in its charter)
Ohio 34-0577130
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1835 Dueber Avenue, S.W., Canton, Ohio 44706-2798
(Address of principal executive offices) (Zip Code)
(330) 438-3000
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
___ ___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES X NO
___ ___
Common shares outstanding at March 31, 2005, 91,401,003.
PART I. FINANCIAL INFORMATION 2.
THE TIMKEN COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
Mar 31 Dec 31
2005 2004
ASSETS ---------- ----------
Current Assets (Thousands of dollars)
Cash and cash equivalents........................... $51,768 $50,967
Accounts receivable, less allowances,
(2005-$24,427; 2004-$24,952)........................ 790,294 717,425
Deferred income taxes............................... 88,092 90,066
Inventories......................................... 936,764 874,833
---------- ----------
Total Current Assets...................... 1,866,918 1,733,291
Property, plant and equipment....................... 3,582,589 3,622,188
Less allowances for depreciation................... 2,034,714 2,039,231
---------- ----------
1,547,875 1,582,957
Goodwill............................................ 190,442 189,299
Other intangible assets............................. 176,634 178,844
Deferred income taxes............................... 82,988 76,834
Other assets........................................ 188,383 177,275
---------- ----------
Total Assets.................................. $4,053,240 $3,938,500
========== ==========
LIABILITIES
Current Liabilities
Accounts payable and other liabilities.............. $528,382 $520,259
Short-term debt and current portion of long-term debt 226,556 158,690
Accrued expenses.................................... 394,331 362,378
---------- ----------
Total Current Liabilities................. 1,149,269 1,041,327
Noncurrent Liabilities
Long-term debt...................................... 610,957 620,634
Accrued pension cost................................ 438,794 468,644
Accrued postretirement benefits cost................ 496,640 490,366
Other noncurrent liabilities........................ 49,589 47,681
---------- ----------
Total Noncurrent Liabilities.............. 1,595,980 1,627,325
Shareholders' Equity
Common stock........................................ 724,045 711,596
Earnings invested in the business................... 892,287 847,738
Accumulated other comprehensive loss................ (308,341) (289,486)
---------- ----------
Total Shareholders' Equity................ 1,307,991 1,269,848
---------- ----------
Total Liabilities and Shareholders' Equity.... $4,053,240 $3,938,500
========== ==========
See accompanying Notes to the Consolidated Condensed Financial Statements.
PART I. FINANCIAL INFORMATION Continued 3.
THE TIMKEN COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) Three Months Ended
Mar 31 Mar 31
2005 2004
---------- ----------
(Thousands of dollars, except share and per share data)
Net sales................................................... $1,304,540 $1,098,785
Cost of products sold....................................... 1,032,690 896,262
---------- ----------
Gross Profit............................................. 271,850 202,523
Selling, administrative and general expenses................ 164,039 142,703
Impairment and restructuring charges ....................... - 730
---------- ----------
Operating Income......................................... 107,811 59,090
Interest expense............................................ (12,675) (11,391)
Interest income............................................. 573 246
Other (expense), net........................................ (4,760) (2,025)
---------- ----------
Income Before Income Taxes .............................. 90,949 45,920
Provision for income taxes.................................. 32,714 17,450
---------- ----------
Net Income ................................................. $ 58,235 $ 28,470
========== ==========
Earnings Per Share*........................................ $ 0.64 $ 0.32
Earnings Per Share - assuming dilution**................... $ 0.63 $ 0.32
Dividends Per Share........................................ $ 0.15 $ 0.13
========== ==========
* Average shares outstanding............................... 90,804,936 89,265,382
** Average shares outstanding - assuming dilution........... 91,871,363 90,137,140
See accompanying Notes to the Consolidated Condensed Financial Statements.
PART I. FINANCIAL INFORMATION Continued 4.
THE TIMKEN COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
Cash Provided (Used) Mar 31 Mar 31
2005 2004
-------- --------
OPERATING ACTIVITIES (Thousands of dollars)
Net income ............................................... $ 58,235 $ 28,470
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization............................ 54,100 53,928
Loss on disposals of assets.............................. 1,924 1,807
Provision for deferred income taxes...................... (3,493) 1,118
Amortization of restricted share awards.................. 1,296 305
Changes in operating assets and liabilities:
Accounts receivable..................................... (82,242) (87,328)
Inventories............................................. (75,771) (15,767)
Other assets............................................ (11,870) (7,808)
Accounts payable and accrued expenses................... 34,898 (3,283)
Foreign currency translation loss....................... 3,204 1,476
-------- --------
Net Cash Used by Operating Activities.................. (19,719) (27,082)
INVESTING ACTIVITIES
Capital expenditures..................................... (32,363) (24,449)
Proceeds from disposals of assets........................ 889 700
Other ................................................... (601) (2,799)
Acquisitions............................................. (6,556) (1,549)
-------- --------
Net Cash Used by Investing Activities.................. (38,631) (28,097)
FINANCING ACTIVITIES
Cash dividends paid to shareholders...................... (13,686) (11,614)
Proceeds from the exercise of stock options.............. 10,075 4,272
Accounts receivable securitization financing borrowings.. 90,000 68,000
Accounts receivable securitization financing payments.... (15,000) (30,000)
Payments on long-term debt............................... (137,227) (37,150)
Proceeds from issuance of long-term debt................. 130,086 47,702
Short-term debt activity - net........................... (2,397) 18,329
-------- --------
Net Cash Provided by Financing Activities.............. 61,851 59,539
Effect of exchange rate changes on cash................... (2,700) 2,029
Increase in Cash and Cash Equivalents..................... 801 6,389
Cash and Cash Equivalents at Beginning of Period.......... 50,967 28,626
-------- --------
Cash and Cash Equivalents at End of Period................ $ 51,768 $ 35,015
======== ========
See accompanying Notes to the Consolidated Condensed Financial Statements.
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 5.
Note 1 -- Basis of Presentation
The accompanying consolidated condensed financial statements (unaudited) for
The Timken Company (the company) have been prepared in accordance with the
instructions to Form 10-Q and do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) and disclosures considered necessary
for a fair presentation have been included. For further information, refer to
the consolidated financial statements and footnotes included in the company's
annual report on Form 10-K for the year ended December 31, 2004.
Reclassifications: Certain amounts reported in the 2004 financial statements
have been reclassified to conform to the 2005 presentation.
Note 2 -- Stock-Based Compensation
The company utilizes the disclosure-only provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation."
The company has elected to follow Accounting Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations
in accounting for its stock options to key associates and directors. Under APB
Opinion No. 25, if the exercise price of the company's stock options equals
the market price of the underlying common stock on the date of grant, no
compensation expense is required.
The effect on net income and earnings per share as if the company had applied
the fair value recognition provisions of SFAS No. 123 is as follows:
Three months ended
Mar 31
2005 2004
-------- --------
(Thousands of dollars)
Net income, as reported $ 58,235 $ 28,470
Add: Stock-based employee
compensation expense, net
of related taxes 829 190
Deduct: Total stock-based
employee compensation
expense determined under
fair value based methods
for all awards, net of
related tax effects (1,608) (958)
-------- --------
Pro forma net income $ 57,456 $ 27,702
======== ========
Earnings per share:
Basic - as reported $ 0.64 $ 0.32
Diluted - as reported $ 0.63 $ 0.32
Basic - pro forma $ 0.63 $ 0.31
Diluted - pro forma $ 0.63 $ 0.31
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 6.
Continued
Note 3 -- Acquisition
On February 18, 2003, the company acquired Ingersoll-Rand Company Limited's
(IR's) Engineered Solutions business, a leading worldwide producer of needle
roller, heavy-duty roller and ball bearings, and motion control components and
assemblies for approximately $840 million, plus $25.1 million of acquisition
costs.
In accordance with FASB EITF Issue No. 95-3, "Recognition of Liabilities in
Connection with a Purchase Business Combination," the company recorded accruals
for severance, exit and relocation costs in the purchase price allocation. The
accruals for exit and relocation costs were fully used. A reconciliation of
the beginning and ending accrual balance for severance is as follows:
(Thousands of dollars)
Balance at December 31, 2004 $ 2,321
Add: additional accruals -
Less: payments (200)
--------
Balance at Mar 31, 2005 $ 2,121
========
Note 4 -- Inventories Mar 31 Dec 31
2005 2004
-------- ---------
(Thousands of dollars)
Finished products $409,765 $392,668
Work-in-process and raw materials 466,963 423,808
Manufacturing supplies 60,036 58,357
-------- --------
$936,764 $874,833
======== ========
An actual valuation of inventory under the LIFO method can be made only at the
end of each year based on the inventory levels and costs at that time.
Accordingly, interim LIFO calculations must necessarily be based on manage-
ment's estimates of expected year-end inventory levels and costs. Because
these are subject to many forces beyond management's control, interim results
are subject to the final year-end LIFO inventory valuation.
Note 5 -- Financing Arrangements Mar 31 Dec 31
2005 2004
Short-term debt: -------- --------
(Thousands of dollars)
Variable-rate lines of credit for certain of the company's
European subsidiaries with various banks with interest
rates ranging from 2.12% to 5.75% at March 31, 2005 $100,738 $109,260
Variable-rate Accounts Receivable Securitization financing
agreement with an interest rate of 3.11% at March 31,
2005 75,000 -
Variable-rate Ohio Water Development Authority revenue
bonds for PEL (2.35% at March 31, 2005) 23,000 23,000
Fixed-rate mortgage for PEL with an interest rate of 9.00% 11,561 11,561
Other 14,587 13,596
-------- --------
$224,886 $157,417
======== ========
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 7.
Continued
Note 5 -- Financing Arrangements (continued)
Refer to Note 11 - Equity Investments for a discussion of PEL's debts, which are
included above.
Mar 31 Dec 31
2005 2004
Long-term debt: -------- ---------
(Thousands of dollars)
Fixed-rate Medium-Term Notes, Series A, due at various
dates through May 2028, with interest rates ranging
from 6.20% to 7.76% $286,500 $286,832
Fixed-rate Unsecured Notes, maturing on February 15,
2010 with a fixed interest rate of 5.75% 247,688 249,258
Variable-rate State of Ohio Water Development Authority
Solid Waste Revenue Bonds, maturing on July 1, 2032
(2.35% at March 31, 2005) 24,000 24,000
Variable-rate State of Ohio Air Quality and Water
Development Revenue Refunding Bonds, maturing on
November 1, 2025 (2.26% at March 31, 2005) 21,700 21,700
Variable-rate State of Ohio Pollution Control Revenue
Refunding Bonds, maturing on June 1, 2033
(2.26% at March 31, 2005) 17,000 17,000
Variable-rate State of Ohio Water Development Revenue
Refunding Bonds, maturing on May 1, 2007
(2.30% at March 31, 2005) 8,000 8,000
Variable-rate Senior credit facility, maturing on
December 31, 2007. The interest rate is LIBOR plus
1.5% (6.12% at March 31, 2005) 3,000 10,000
Other 4,739 5,117
-------- --------
612,627 621,907
Less: Current Maturities 1,670 1,273
-------- --------
$610,957 $620,634
======== ========
The Accounts Receivable Securitization financing agreement (Asset
Securitization), which provides for borrowings up to $125 million, is limited
to certain borrowing base calculations, and is secured by certain trade
receivables. Under the terms of the Asset Securitization, the company sells,
on an ongoing basis, certain domestic trade receivables to Timken Receivables
Corporation, a wholly owned consolidated subsidiary, that in turn uses the
trade receivables to secure the borrowings, which are funded through a vehicle
that issues commercial paper in the short-term market. As of March 31, 2005,
there was $75.0 million outstanding under this facility, which reduced the
availability to $50.0 million. This balance is reflected on the company's
consolidated condensed balance sheet as of March 31, 2005 in short-term debt.
The yield on the commercial paper, which is the commercial paper rate plus
program fees, is considered a financing cost, and is included in interest
expense on the consolidated statements of income. This rate was 3.11% at
March 31, 2005.
The lines of credit of the company's European subsidiaries provide for
borrowings up to $136.8 million. At March 31, 2005, the company had
outstanding borrowings of $100.7 million, which reduced the availability
under these facilities to $36.1 million.
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited)
Continued 8.
Note 5 -- Financing Arrangements (continued)
At March 31, 2005, the company had outstanding letters of credit totaling
$77.1 million and borrowings of $3.0 million under the $500 million senior
credit facility, which reduced the availability under that facility to
$419.9 million. Under that facility, the company has three financial
covenants: consolidated net worth; leverage ratio; and fixed charge coverage
ratio. At March 31, 2005, the company was in compliance with the covenants
under its senior credit facility and its other debt agreements.
Note 6 -- Income Tax Provision Three Months Ended
Mar 31 Mar 31
2005 2004
-------- --------
(Thousands of dollars)
U.S.
Federal $ 27,938 $11,062
State & Local 2,608 1,221
Foreign 2,168 5,167
-------- --------
$ 32,714 $ 17,450
======== ========
The effective tax rates were 36% and 38% for the three months ended
March 31, 2005 and 2004, respectively. The effective tax rate for both periods
exceeded the U.S. statutory tax rate as a result of losses at certain foreign
operations that were not available to reduce overall tax expense, taxes paid to
state and local jurisdictions, and tax on foreign remittances. These unfavorable
items were partially mitigated by beneficial foreign tax rates, tax holidays and
other permanent differences. The effective tax rate in 2005 decreased from 2004
due primarily to certain tax planning strategies that resulted in lower foreign
taxes.
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited)
Continued 9.
Mar 31 Dec 31
Note 7 -- Shareholders' Equity 2005 2004
-------- --------
Class I and Class II serial preferred stock (Thousands of dollars)
without par value:
Authorized -- 10,000,000 shares each class
Issued - none $ - $ -
Common Stock without par value:
Authorized -- 200,000,000 shares
Issued (including shares in treasury)
2005 - 91,434,084 shares
2004 - 90,511,833 shares
Stated Capital 53,064 53,064
Other paid-in capital 671,910 658,730
Less cost of Common Stock in treasury
2005 - 33,081 shares
2004 - 7,501 shares (929) (198)
-------- --------
$724,045 $711,596
======== ========
An analysis of the change in capital and earnings invested in the business is as follows:
Common Stock Earnings Accumulated
Other Invested Other
Stated Paid-In in the Comprehensive Treasury
Capital Capital Business Loss Stock Total
------- -------- -------- ---------- -------- ----------
(Thousands of dollars)
Balance December 31, 2004 $53,064 $658,730 $847,738 ($289,486) ($198) $1,269,848
Net Income 58,235 58,235
Foreign currency translation adjustment (21,586) (21,586)
Minimum pension liability adjustment 692 692
Change in fair value of derivative financial
instruments, net of reclassifications
(net of income tax of $1,194) 2,039 2,039
---------
Total comprehensive income 39,380
Dividends - $0.15 per share (13,686) (13,686)
Tax benefit from exercise of stock options 1,469 1,469
Issuance of 922,251 shares from authorized
and surrender of 25,580 shares to treasury
related to stock option plans 11,711 (731) 10,980
------- -------- -------- ---------- -------- ----------
Balance March 31, 2005 $53,064 $671,910 $892,287 ($308,341) ($929) $1,307,991
======= ======== ======== ========== ======== ==========
The total comprehensive income for the three months ended March 31, 2004 was $25,073.
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 10.
Continued
Note 8 -- Impairment and Restructuring Charges
Impairment and restructuring charges are comprised of the following:
Three Months Ended
Mar 31 Mar 31
2005 2004
---------- ----------
(Thousands of dollars)
Severance expense and related benefit costs $ - $ 730
---------- ----------
Total $ - $ 730
========== ==========
In the three months ended March 31, 2004, restructuring charges related
primarily to severance and related benefit costs for associates who exited
the company as a result of the integration of Torrington.
Impairment and restructuring charges by segment are as follows:
Auto Industrial Steel Total
------ ------------ ------- ------
(Thousands of dollars)
For the three months ended Mar 31, 2004:
Severance expense and related benefits $ 58 $ 671 $ 1 $ 730
------ ------------ ------- ------
Total $ 58 $ 671 $ 1 $ 730
====== ============ ======= ======
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 11.
Continued
Note 8 -- Impairment and Restructuring Charges (continued)
The following is a rollforward of accrued severance and exit costs:
(Thousands of dollars)
Balance at December 31, 2004 $4,116
Add: provisions -
Less: payments (2,405)
--------
Balance at March 31, 2005 $1,711
========
The company continues to evaluate the competitiveness of its operations and may
from time to time determine to close those operations that are not competitive.
The company may incur charges associated with the closure of such operations in
future periods that may be material.
In May 2004, the company announced a plan to begin closing its three bearing
plants in Canton, Ohio. In June 2004, the company and the United Steelworkers
of America (union) began the effects bargaining process. In July 2004, the
company and the union agreed to enter into early formal negotiations over the
current labor contract, which expires in September 2005. Because the company
and the union are still in discussions, final decisions have not been made
regarding the plant closings, including the timing, the impact on employment,
and the magnitude of savings and charges for restructuring, which could be
material. Therefore, the company is unable to determine the impact of these
plant closings in accordance with SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities."
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 12.
Continued
Note 9 -- Segment Information
The primary measurement used by management to measure the financial performance
of each Group is adjusted EBIT (earnings before interest and taxes, excluding
the effect of amounts related to certain items that management considers not
representative of ongoing operations such as impairment and restructuring,
manufacturing rationalization / integration costs, one-time gains on sales of
assets, allocated receipts received or payments made under the Continued Dumping
and Subsidy Offset Act (CDSOA), and other items similar in nature).
(Thousands of Dollars) Three Months Ended
Mar 31 Mar 31
2005 2004
Industrial Group -------- --------
Net sales to external customers $468,449 $410,269
Intersegment sales 398 289
Depreciation and amortization 18,063 18,007
EBIT, as adjusted 46,999 35,766
Automotive Group
Net sales to external customers $420,265 $415,602
Depreciation and amortization 20,699 20,490
EBIT (loss), as adjusted (5,100) 18,323
Steel Group
Net sales to external customers $415,826 $272,914
Intersegment sales 51,605 36,417
Depreciation and amortization 15,338 15,431
EBIT, as adjusted 63,725 2,724
Reconciliation to Income Before Income Taxes:
Total EBIT, as adjusted, for
reportable segments $105,624 $ 56,813
Impairment and restructuring charges - (730)
Integration expenses - (5,364)
CDSOA receipts, net of expenses - 7,743
Manufacturing rationalization expenses (1,533) -
Adoption of FIN 46 - (948)
Other 386 -
Interest expense (12,675) (11,391)
Interest income 573 246
Intersegment adjustments (1,426) (449)
------- -------
Income before income taxes $ 90,949 $ 45,920
======== ========
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 13.
Continued
Note 10 - Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill for the three months ended
March 31, 2005 are as follows:
(Thousands of Dollars) Balance Balance
12/31/04 Acquisition Other 3/31/05
--------- ----------- ------- ---------
Goodwill:
Industrial $ 187,621 $ 1,406 $ (168) $ 188,859
Automotive 1,678 - (95) 1,583
--------- ---------- -------- ---------
$ 189,299 $ 1,406 $ (263) $ 190,442
========= ========== ======== =========
The following table displays intangible assets as of March 31, 2005 and
December 31, 2004:
(Thousands of Dollars) As of March 31, 2005
----------------------------------
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
-------- ------------ --------
Intangible assets subject to amortization:
Industrial $ 38,556 $ (7,328) $ 31,228
Automotive 62,717 (11,806) 50,911
Steel 697 (145) 552
-------- ------------ --------
$101,970 $ (19,279) $ 82,691
======== =========== ========
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 14.
Continued
Note 10 - Goodwill and Other Intangible Assets (continued)
Intangible assets not subject to amortization:
Goodwill $190,442 $ - $190,442
Intangible pension asset 92,847 - 92,847
Other 1,096 - 1,096
-------- ----------- --------
$284,385 $ - $284,385
======== =========== ========
Total Intangible Assets $386,355 $ (19,279) $367,076
======== =========== ========
As of December 31, 2004
----------------------------------
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
-------- ------------ --------
Intangible assets subject to amortization:
Industrial $ 38,724 $ (6,568) $ 32,156
Automotive 62,572 (10,358) 52,214
Steel 633 (126) 507
-------- ----------- --------
$101,929 $ (17,052) $ 84,877
======== =========== ========
Intangible assets not subject to amortization:
Goodwill $189,299 $ - $189,299
Intangible pension asset 92,860 92,860
Other 1,107 - 1,107
-------- ----------- --------
$283,266 $ - $283,266
======== =========== ========
Total Intangible Assets $385,195 $ (17,052) $368,143
======== =========== ========
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 15.
Continued
Note 10 - Goodwill and Other Intangible Assets (continued)
Amortization expense for intangible assets was approximately $2.2 million for
the three months ended March 31, 2005, and is estimated to be approximately
$8.5 million annually for the next five fiscal years.
Note 11 - Equity Investments
The balances related to investments accounted for under the equity method are
reported in other assets in the consolidated condensed balance sheets, which
were approximately $28.5 million and $29.8 million at March 31, 2005 and
December 31, 2004, respectively.
Equity investments are reviewed for impairment when circumstances (such as lower
than expected financial performance or change in strategic direction) indicate
that the net book value of the investment may not be recoverable. If an
impairment does exist, the equity investment is written down to its fair value
with a corresponding charge to the statement of operations.
During 2000, the company's Steel Group invested in a joint venture, PEL
Technologies (PEL), to commercialize a proprietary technology that converts iron
units into engineered iron oxides for use in pigments, coatings and abrasives.
The company concluded that PEL is a variable interest entity and that the
company is the primary beneficiary. In accordance with FASB Interpretation No.
46, "Consolidation of Variable Interest Entities, an interpretation of
Accounting Research Bulletin No. 51," (FIN 46), the company consolidated PEL
effective March 31, 2004. The adoption of FIN 46 resulted in a charge,
representing the cumulative effect of change in accounting principle, of
$0.9 million, which is reported in other expense on the consolidated statement
of income. Also, the adoption of FIN 46 increased the consolidated condensed
balance sheet as follows: current assets by $1.7 million; property, plant and
equipment by $11.3 million; short-term debt by $11.6 million; accounts payable
and other liabilities by $0.6 million; and other non-current liabilities by
$1.7 million. All of PEL's assets are collateral for its obligations. Except
for PEL's indebtedness for which the company is a guarantor, PEL's creditors
have no recourse to the general credit of the company. The company is the
guarantor of certain debt for PEL. During 2003, the company recorded the
aggregate amount outstanding at that time on the debt underlying these
guarantees. The amount outstanding at March 31, 2005 on PEL's debt guaranteed
by the company is $23.0 million, which is reported as short-term debt on the
consolidated condensed balance sheet.
PART I. NOTES TO FINANCIAL STATEMENTS (Unaudited) 16.
Continued
Note 12 - Retirement and Postretirement Benefit Plans
The following table sets forth the net periodic benefit cost for the company's
retirement and postretirement benefit plans. The amounts for the three months
ended March 31, 2005 are based on 2004 year-end actuarial calculations.
Consistent with prior years, the year-end calculations will be updated later in
the year. These updated calculations may result in different net periodic
benefit cost for 2005. The net periodic benefit cost recorded for the three
months ended March 31, 2005 is the company's best estimate of the amounts to be
recorded for the year ended December 31, 2005.
Pension Postretirement
------------------- --------------------
Three Months Ended Three Months Ended
Mar 31 Mar 31 Mar 31 Mar 31
2005 2004 2005 2004
--------- --------- -------- --------
(Thousands of dollars)
Service cost $ 11,282 $ 10,689 $ 1,564 $ 1,843
Interest cost 39,610 36,177 12,604 12,522
Expected return on
plan assets (38,472) (36,312) - -
Amortization of prior
service cost 3,112 3,912 (1,284) (1,292)
Recognized net
actuarial loss 11,563 7,644 4,752 4,288
Amortization of
transition asset (28) (27) - -
--------- --------- -------- --------
Net periodic benefit cost $ 27,067 $ 22,083 $17,636 $17,361
========= ========= ======== ========
17.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
OVERVIEW
- --------
Introduction:
The Timken Company is a leading global manufacturer of highly engineered
antifriction bearings and alloy steels and a provider of related products and
services. Timken operates under three segments: Industrial Group, Automotive
Group and Steel Group.
The Industrial and Automotive Groups design, manufacture and distribute a range
of bearings and related products and services. Industrial Group customers
include both original equipment manufacturers and distributors for agriculture,
construction, mining, energy, mill, machine tooling, aerospace, and rail
applications. Automotive Group customers include original equipment
manufacturers of passenger cars, light trucks, and medium- to heavy-duty trucks
and their suppliers. Steel Group products include steels of intermediate
alloy, low alloy and carbon grades in both solid and tubular sections, as well
as custom-made steel products, for both industrial and automotive applications,
including bearings.
Financial Overview:
For the three months ended March 31, 2005, The Timken Company reported net sales
of approximately $1.3 billion, an increase of approximately 19 percent from the
first quarter of 2004. Sales were higher across all three business segments.
For the three months ended March 31, 2005, earnings per diluted share were
$0.63, compared to $0.32 per diluted share for the first quarter of 2004.
The company benefited from continued broad strength in industrial markets,
leading to improved performance in the Industrial and Steel Groups. The
Automotive Group's results reflected the relative weakness of the North American
automotive industry.
Demand in the Industrial Group's end markets continued to be robust with the
strongest growth in rail, mining, construction, agriculture, and heavy
industrial applications. In addition to the increased sales volume, profit for
the Industrial Group benefited from price increases and improved productivity,
partially offset by increased costs for growth initiatives.
The Automotive Group's net sales increased from the first quarter of last year
due to continued strong heavy truck demand and new platforms launched in 2004,
nearly offset by a production decline in North American light vehicles. The
Automotive Group's profitability was negatively impacted by higher raw material
costs and lower production volume in passenger car applications.
The Steel Group benefited from strong performance in both its alloy steel and
specialty steel businesses. The increase in the Steel Group's net sales over
the first quarter of last year was due to higher volume, surcharges and price
increases. The strongest market sectors were aerospace, energy and general
industrial. The Steel Group's improved profitability reflects increased volume,
price increases and its success in recovering higher raw material costs through
surcharges. The Steel Group's profitability further benefited from high
operating levels and labor productivity improvements.
18.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
THE STATEMENT OF OPERATIONS
- ----------------------------
Overview:
1Q 2005 1Q 2004 $ Change % Change
------- ------- -------- --------
(Dollars in millions, except earnings per share)
Net sales $1,304.5 $1,098.8 $205.7 18.7%
Net income $ 58.2 $ 28.5 $ 29.7 104.2%
Earnings per share - diluted $ 0.63 $ 0.32 $ 0.31 96.9%
Average number of shares
- diluted 91,871,363 90,137,140 - 1.9%
Sales by Segment:
1Q 2005 1Q 2004 $ Change % Change
------- ------- --------- --------
(Dollars in millions and exclude intersegment sales)
Industrial Group $ 468.4 $ 410.3 $ 58.1 14.2%
Automotive Group 420.3 415.6 4.7 1.1%
Steel Group 415.8 272.9 142.9 52.4%
-------- -------- --------- -------
Total company $1,304.5 $1,098.8 $205.7 18.7%
======== ======== ========= =======
The Industrial Group's net sales increased due to stronger demand in most end
markets, especially rail, mining, construction, agriculture and heavy industrial
applications. The Automotive Group's net sales increased due to continued
strong heavy truck demand and new platforms launched in 2004, nearly offset by a
production decline in North American light vehicles. The increase in the Steel
Group's net sales over the first quarter of last year was due to higher volume,
surcharges and price increases. The strongest market sectors for the Steel
Group were aerospace, energy and general industrial
Gross Profit:
1Q 2005 1Q 2004 $ Change % Change
------- ------- --------- --------
(Dollars in millions)
Gross profit $271.9 $202.5 $69.4 34.3%
Gross profit % to net sales 20.8% 18.4% - 2.4%
Manufacturing rationalization /
integration charges included in
cost of products sold $ 1.1 $ 1.4 $(0.3) (21.4)%
19.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Gross profit benefited from higher sales volume, price increases, surcharges
and improved manufacturing performance leveraging higher volumes. Gross profit
was negatively impacted by higher raw material costs and lower production volume
for North American passenger cars. In the Industrial and Steel Groups, the
company recovered a significant portion of the raw material cost increases
through price increases and surcharges.
In the first quarter of 2005, manufacturing rationalization charges related to
the beginning of the rationalization of the company's Canton, Ohio bearing
facilities. In the first quarter of 2004, integration charges related to
expenses associated with the integration of Torrington, which the company
acquired in February 2003.
Selling, Administrative and General Expenses:
1Q 2005 1Q 2004 $ Change % Change
------- ------- --------- --------
(Dollars in millions)
Selling, administrative and
general expenses $164.0 $142.7 $21.3 14.9%
Selling, administrative and
general expenses % to net sales 12.6% 13.0% - (0.4)%
Manufacturing rationalization /
integration charges included in
selling, administrative and
general expenses $ 0.4 $ 4.0 $(3.6) (90.0)%
The increase in selling, administrative and general expenses for the three
months ended March 31, 2005 compared to the same period last year was due
primarily to higher sales, costs for growth initiatives and higher accruals for
performance-based compensation. The decrease between periods in the percentage
of selling, administrative and general expenses to net sales was primarily the
result of the company's ability to leverage expenses on higher sales.
In the first quarter of 2005, manufacturing rationalization charges related to
the beginning of the rationalization of the company's Canton, Ohio bearing
facilities. In the first quarter of 2004, the integration charges related to
expenses associated with the integration of Torrington, primarily for
information technology and purchasing initiatives.
Impairment and Restructuring Charges:
1Q 2005 1Q 2004 $ Change
------- ------- ---------
(Dollars in millions)
Severance and related benefit costs $ - $0.7 $(0.7)
In the first quarter of 2004, restructuring charges related primarily to
severance and related benefit costs for associates who exited the company as a
result of the integration of Torrington.
The company continues to evaluate the competitiveness of its operations and may
from time to time determine to close those operations that are not competitive.
The company may incur charges associated with the closure of such operations in
future periods that may be material.
20.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
In May 2004, the company announced a plan to begin closing its three bearing
plants in Canton, Ohio. In June 2004, the company and the United Steelworkers
of America (union) began the effects bargaining process. In July 2004, the
company and the union agreed to enter into early formal negotiations over the
current labor contract, which expires in September 2005. Because the company
and the union are still in discussions, final decisions have not been made
regarding the plant closings, including the timing, the impact on employment,
and the magnitude of savings and charges for restructuring, which could be
material. Therefore, the company is unable to determine the impact of these
plant closings in accordance with SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities."
Interest Expense and Income:
1Q 2005 1Q 2004 $ Change
------- ------- ---------
(Dollars in millions)
Interest expense $12.7 $11.4 $1.3
Interest income $ 0.6 $ 0.2 $0.4
Interest expense for the three months ended March 31, 2005 increased compared to
the same period last year due to higher effective interest rates and higher
average debt outstanding.
Other Income and Expense:
1Q 2005 1Q 2004 $ Change
-------- --------- ---------
(Dollars in millions)
CDSOA receipts, net of expenses $ - $ 7.7 $ (7.7)
Other (expense), net (4.8) (9.7) 4.9
-------- ------- ---------
Total $ (4.8) $(2.0) $ (2.8)
======== ======= =========
For the three months ended March 31, 2005, other expense, net included
donations, losses on the disposal of assets, losses from equity investments, and
foreign currency exchange losses. For the three months ended March 31, 2004,
other expense, net included losses from equity investments, foreign currency
exchange losses, losses on the disposal of assets, and donations. For the three
months ended March 31, 2004, other expense, net also included the adoption of
Financial Accounting Standards Board (FASB) Interpretation No. 46,
"Consolidation of Variable Interest Entities, an interpretation of Accounting
Research Bulletin No. 51" (FIN 46). The decrease between periods in other
expense, net was due primarily to lower losses from equity investments in the
first quarter of 2005, lower foreign currency losses in the first quarter of
2005 and the adoption of FIN 46 in the first quarter of 2004.
U.S. Continued Dumping and Subsidy Offset Act (CDSOA) receipts are reported net
of applicable expenses. CDSOA provides for distribution of monies collected by
U.S. Customs from antidumping cases to qualifying domestic producers where the
domestic producers have continued to invest in their technology, equipment and
people. The amount received in the first quarter of 2004 related to
Torrington's bearing business. Pursuant to the terms of the agreement under
which the company purchased Torrington, Timken delivered to the seller of the
Torrington business 80% of the CDSOA payments received in 2004 for Torrington's
21.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
bearing business. Timken is under no further obligation to transfer any CDSOA
payments to the seller of the Torrington business. The company cannot predict
whether it will receive any additional payments under CDSOA in 2005 or, if so,
in what amount. If the company does receive any additional CDSOA payments, they
will most likely be received in the fourth quarter. In September 2002, the
World Trade Organization (WTO) ruled that such payments are inconsistent with
international trade rules. The U.S. Trade Representative appealed this ruling,
but the WTO upheld the ruling on January 16, 2003. CDSOA continues to be in
effect in the United States at this time.
Income Tax Expense:
1Q 2005 1Q 2004 $ Change % Change
------- ------- --------- --------
(Dollars in millions)
Income tax expense $32.7 $17.5 $15.2 86.9%
Effective tax rate 36.0% 38.0% - (2.0)%
The effective tax rate for both periods exceeded the U.S. statutory tax rate as
a result of losses at certain foreign operations that were not available to
reduce overall tax expense, taxes paid to state and local jurisdictions, and tax
on foreign remittances. These unfavorable items were partially mitigated by
beneficial foreign tax rates, tax holidays and other permanent differences.
The effective tax rate in the first quarter of 2005 decreased from the first
quarter of 2004 due primarily to certain tax planning strategies that resulted
in lower foreign taxes.
Business Segments:
The primary measurement used by management to measure the financial performance
of each Group is adjusted EBIT (earnings before interest and taxes, excluding
the effect of amounts related to certain items that management considers not
representative of ongoing operations such as impairment and restructuring,
manufacturing rationalization / integration costs, one-time gains on sales of
assets, allocated receipts received or payments made under the CDSOA, and other
items similar in nature). Refer to Note 9 - Segment Information in the notes
to the consolidated condensed financial statements for the reconciliation of
adjusted EBIT by Group to consolidated income before income taxes.
Industrial Group:
1Q 2005 1Q 2004 $ Change % Change
------- ------- --------- --------
(Dollars in millions)
Net sales, including intersegment
sales $468.8 $410.6 $58.2 14.2%
Adjusted EBIT $ 47.0 $ 35.8 $11.2 31.3%
Adjusted EBIT margin 10.0% 8.7% - 1.3%
Sales by the Industrial Group include global sales of bearings and other
products and services (other than steel) to a diverse customer base, including:
industrial equipment; construction and agriculture; rail; and aerospace and
defense customers. The Industrial Group also includes aftermarket distribution
22.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
operations for products other than steel. The Industrial Group's net sales
increased due to stronger demand in most end markets, especially rail, mining,
construction, agriculture, and heavy industrial applications. Profitability for
the Industrial Group in the first quarter of 2005 was higher than the same
quarter of 2004 primarily as a result of increased volume, price increases and
improved productivity, partially offset by increased costs for growth
initiatives. The ongoing strength of industrial demand continues to test supply
chains in the industry. The Industrial Group continues to focus on increasing
capacity, improving customer service and pursuing opportunities for global
growth. For the remainder of 2005, the company expects the Industrial Group to
benefit from continued strength in global industrial markets. The company
expects profitability for the Industrial Group in 2005 to be higher than in
2004.
Automotive Group:
1Q 2005 1Q 2004 $ Change % Change
------- ------- --------- --------
(Dollars in millions)
Net sales, including intersegment
sales $420.3 $415.6 $ 4.7 1.1%
Adjusted EBIT (loss) $ (5.1) $ 18.3 $(23.4) -
Adjusted EBIT (loss) margin (1.2)% 4.4% - (5.6)%
The Automotive Group includes sales of bearings and other products and services
(other than steel) to automotive original equipment manufacturers and their
suppliers. The Automotive Group's net sales increased due to continued strong
heavy truck demand and new platforms launched in 2004, nearly offset by a
production decline in North American light vehicles. Profitability for the
Automotive Group in the first quarter of 2005 was negatively impacted by: higher
raw material costs, which could not be completely offset by price increase or
surcharges due to contractual commitments with certain customers; lower
production volume for North American passenger cars; and additional costs
incurred to run certain facilities serving the heavy truck industry beyond their
economic capacity. The Automotive Group continues to make progress in its
ability to recover higher raw material costs through surcharges and price
increases. For the remainder of 2005, the company expects North American light
vehicle production to be down slightly and medium and heavy truck production to
remain strong. The company expects the Automotive Group's profitability in 2005
to improve from 2004 as a result of productivity gains, price increases and
surcharges.
Steel Group:
1Q 2005 1Q 2004 $ Change % Change
------- ------- --------- --------
(Dollars in millions)
Net sales, including intersegment
sales $467.4 $309.3 $158.1 51.1%
Adjusted EBIT $ 63.7 $ 2.7 $ 61.0 2,259.3%
Adjusted EBIT margin 13.6% 0.9% - 12.7%
The Steel Group's products include steels of intermediate alloy, low alloy and
carbon grades in both solid and tubular sections, as well as custom-made steel
products, for both industrial and automotive applications, including bearings.
The increase in the Steel Group's net sales in the first quarter of 2005 over
the same period last year was due to higher volume, surcharges and price
increases. The strongest market sectors were aerospace, energy and general
23.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
industrial. Profitability for the Steel Group in the first quarter of 2005 was
higher than in the same quarter of 2004 due to increased volume, price increases
and increased recovery of raw material costs through surcharges. Increased
volume and labor productivity improvements further benefited earnings. During
the three months ended March 31, 2005, the Steel Group's results benefited from
scrap surcharges in excess of costs. The company does not expect this trend to
continue. For the remainder of 2005, the company expects the Steel Group to
benefit from continued strength in global industrial markets. The company
expects profitability for the Steel Group in 2005 to be higher than 2004.
THE BALANCE SHEET
- -----------------
Total assets as shown on the consolidated condensed balance sheet at March 31,
2005 increased by $114.7 million from December 31, 2004. This increase was due
primarily to increased working capital required to support higher sales.
Current Assets:
03/31/05 12/31/04 $ Change % Change
-------- -------- -------- --------
(Dollars in millions)
Cash and cash equivalents $ 51.8 $ 51.0 $ 0.8 1.6%
Accounts receivable, net 790.3 717.4 72.9 10.2%
Deferred income taxes 88.0 90.1 (2.1) (2.3)%
Inventories 936.8 874.8 62.0 7.1%
-------- -------- -------- --------
Total current assets $1,866.9 $1,733.3 $133.6 7.7%
======== ======== ======== ========
The increase in accounts receivable was due primarily to sales being higher in
the first quarter of 2005, compared to the fourth quarter of 2004. The increase
in inventories was due primarily to higher volume and increased raw material
costs, partially offset by the impact of foreign currency translation.
Property, Plant and Equipment - Net:
03/31/05 12/31/04 $ Change % Change
-------- -------- -------- ---------
(Dollars in millions)
Property, plant and equipment
- cost $3,582.6 $3,622.2 $(39.6) (1.1)%
Less: allowances for depreciation (2,034.7) (2,039.2) 4.5 0.2%
-------- -------- -------- ---------
Property, plant and equipment
- net $1,547.9 $1,583.0 $(35.1) (2.2)%
======== ======== ======== =========
The decrease in property, plant and equipment - net was due primarily to
depreciation expense in excess of capital expenditures and the impact of foreign
currency translation.
24.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Other Assets:
03/31/05 12/31/04 $ Change % Change
-------- -------- -------- ---------
(Dollars in millions)
Goodwill $190.4 $189.3 $ 1.1 0.6%
Other intangible assets 176.6 178.8 (2.2) (1.2)%
Deferred income taxes 83.0 76.8 6.2 8.1%
Other assets 188.4 177.3 11.1 6.3%
-------- -------- -------- ---------
Total other assets $638.4 $622.2 $16.2 2.6%
======== ======== ======== =========
The increase in other assets was due primarily to the timing of payment of
prepaid expenses.
Current Liabilities:
03/31/05 12/31/04 $ Change % Change
-------- -------- -------- ---------
(Dollars in millions)
Short-term debt $ 226.6 $ 158.7 $ 67.9 42.8%
Accounts payable and other
liabilities 528.4 520.2 8.2 1.6%
Accrued expenses 394.3 362.4 31.9 8.8%
-------- -------- -------- ---------
Total current liabilities $1,149.3 $1,041.3 $ 108.0 10.4%
======== ======== ======== =========
The increase in short-term debt was due primarily to additional borrowings,
mainly under the company's asset securitization facility, as a result of
seasonal working capital requirements and cash contributions to its U.S.-based
pension plans. The increase in accounts payable and other liabilities was due
primarily to an increase in trade accounts payable resulting from increased
volume, partially offset by semi-annual interest payments on the company's long-
term debt. The increase in accrued expenses was due primarily to a
reclassification from the long-term portion of accrued pension cost to the
current portion based upon the company's estimate of contributions to its
pension plans in the next twelve months and an increase in income taxes payable
due to current year income tax expense, partially offset by payments for
performance-based compensation.
Non-Current Liabilities:
03/31/05 12/31/04 $ Change % Change
-------- -------- -------- ---------
(Dollars in millions)
Long-term debt $ 610.9 $ 620.6 $ (9.7) (1.6)%
Accrued pension cost 438.8 468.6 (29.8) (6.4)%
Accrued postretirement benefits
cost 496.7 490.4 6.3 1.3%
Other non-current liabilities 49.6 47.7 1.9 4.0%
-------- -------- -------- ---------
Total non-current liabilities $1,596.0 $1,627.3 $(31.3) (1.9)%
======== ======== ======== =========
25.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
The decrease in long-term debt related primarily to payments on borrowings
outstanding under the company's senior credit facility. The decrease in accrued
pension cost was due primarily to contributions to the company's U.S.-based
pension plans during the three months ended March 31, 2005 and the
reclassification to the current portion of accrued pension cost, partially
offset by current year accruals for pension expense.
Shareholders' Equity:
03/31/05 12/31/04 $ Change % Change
-------- -------- -------- ---------
(Dollars in millions)
Common stock $ 724.1 $ 711.6 $12.5 1.8%
Earnings invested in the business 892.3 847.7 44.6 5.3%
Accumulated other comprehensive
loss (308.4) (289.5) (18.9) (6.5)%
-------- -------- -------- ---------
Total shareholders' equity $1,308.0 $1,269.8 $38.2 3.0%
======== ======== ======== =========
The increase in common stock was due primarily to stock option exercises by
employees. Earnings invested in the business were increased by net income,
partially offset by dividends declared. The decrease in accumulated other
comprehensive loss was due primarily to foreign currency translation and the
strength of the U.S. dollar relative to other currencies. For discussion
regarding the impact of foreign currency translation, refer to "Foreign
Currency" in the Other Information section below.
-----------------
CASH FLOWS
- -----------
1Q 2005 1Q 2004 $ Change
-------- --------- ---------
(Dollars in millions)
Net cash used by
operating activities $(19.7) $ (27.1) $ 7.4
Net cash used by investing
activities (38.6) (28.1) (10.5)
Net cash provided by
financing activities 61.8 59.6 2.2
Effect of exchange rate
changes on cash (2.7) 2.0 (4.7)
-------- --------- ---------
Increase in cash and
cash equivalents $ 0.8 $ 6.4 -
======== ======== =========
The decrease in net cash used by operating activities of $19.7 million was
primarily the result of higher net income, adjusted for non-cash items equaling
$112.1 million in the first quarter of 2005, compared to $85.6 million of
similar non-cash items in the same quarter of 2004. The non-cash items include
depreciation and amortization expense, gain or loss on disposals of assets,
deferred income tax provision, and amortization of restricted share awards.
The company made cash contributions to its U.S.-based pension plans in the first
quarter of 2005 of $36.6 million, compared to $62.5 million in the same quarter
of 2004. Net cash used by operating activities was negatively impacted by cash
used for other changes in operating assets and liabilities of $95.2 million in
26.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
the first quarter of 2005, compared to $50.2 million in the same quarter of
2004, which was primarily the result of working capital requirements for
increased sales volume.
The increase in net cash used by investing activities was due primarily to
higher capital expenditures in the first quarter of 2005 compared to the same
quarter of 2004.
The activity in financing activities was comparable between periods.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Total debt was $837.5 million at March 31, 2005, compared to $779.3 million at
December 31, 2004. Net debt was $785.7 million at March 31, 2005, compared to
$728.4 million at December 31, 2004. The net debt to capital ratio was 37.5%
at March 31, 2005, compared to 36.5% at December 31, 2004. The company expects
that any cash requirements in excess of cash generated from operating activities
will be met by the availability under the accounts receivable securitization
facility and the senior credit facility. At March 31, 2005, the company had
outstanding letters of credit totaling $77.1 million and borrowings of $3.0
million under the $500 million senior credit facility, which reduced the
availability under that facility to $419.9 million. Also, at March 31, 2005,
the company had outstanding borrowings of $75.0 million under the $125 million
accounts receivable securitization facility, which reduced the availability
under that facility to $50.0 million. The company believes it has sufficient
liquidity to meet its obligations through 2006.
Reconciliation of Total Debt to Net Debt and the Ratio of Net Debt to Capital:*
Net debt:
3/31/05 12/31/04
-------- ---------
(Dollars in millions)
Short-term debt $226.6 $158.7
Long-term debt 610.9 620.6
-------- ---------
Total debt 837.5 779.3
Less: cash and cash equivalents (51.8) (50.9)
-------- ---------
Net debt $785.7 $728.4
======== =========
Ratio of net debt to capital:
3/31/05 12/31/04
-------- ---------
(Dollars in millions)
Net debt $ 785.7 $ 728.4
Shareholders' equity 1,308.0 1,269.8
-------- ---------
Net debt + shareholders'
equity (capital) $ 2,093.7 $ 1,998.2
======== =========
Ratio of net debt to capital 37.5% 36.5%
======== =========
27.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
* The company presents net debt because it believes net debt is more
representative of the company's indicative financial position due to a
temporary increase in cash and cash equivalents. This information is
provided as additional information concerning the company's financial
position.
Under its $500 million senior credit facility, the company has three financial
covenants: a consolidated net worth level; a leverage ratio; and a fixed charge
coverage ratio. At March 31, 2005, the company was in compliance with the
covenants under its senior credit facility and its other debt agreements.
During the three months ended March 31, 2005, Standard & Poor's Rating Services
and Moody's Investors Services improved their outlook on Timken debt from
"negative" to "stable" and also reaffirmed their ratings of BBB- and Ba1,
respectively.
The company's contractual debt obligations and contractual commitments
outstanding as of March 31, 2005 are as follows:
Payments Due by Period (in millions)
Total Less than 1-3 3-5 More than
1 Year Years Years 5 Years
------ --------- ------- ------ ----------
Contractual Obligations:
Long-term debt $612.6 $ 1.7 $124.9 $250.4 $235.6
Short-term debt 224.9 224.9 - - -
Operating Leases 104.9 19.1 32.4 20.2 33.2
Supply Agreement 6.1 4.9 1.2 - -
------ --------- ------- ------ ----------
Total $948.5 $250.6 $158.5 $270.6 $268.8
====== ========= ======= ====== ==========
The company expects to make cash contributions of $135.0 million to its global
defined benefit plans in 2005. Also, the company expects its postretirement
benefit payments will total $59.7 million in 2005. Refer to Note 13 to the
company's consolidated financial statements in the company's Annual Report on
Form 10-K for the year ended December 31, 2004. In connection with the sale
of the company's Ashland tooling plant in 2002, the company entered into a $25.9
million four-year supply agreement, pursuant to which the company purchases
tooling, that expires on June 30, 2006. As of March 31, 2005, the weighted
average maturity date and interest rate of the company's total debt were 8.4
years and 5.23%, respectively.
During the first three months of 2005, the company did not purchase any shares
of its common stock as authorized under the company's 2000 common stock purchase
plan. This plan authorizes the company to buy in the open market or in
privately negotiated transactions up to four million shares of common stock,
which are to be held as treasury shares and used for specified purposes. The
company may exercise this authorization until December 31, 2006. The company
does not expect to be active in repurchasing its shares under this plan in the
near-term.
The company does not have any off-balance sheet arrangements with unconsolidated
entities or other persons.
28.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
OTHER INFORMATION
- ------------------
Foreign Currency:
Assets and liabilities of subsidiaries are translated at the rate of exchange in
effect on the balance sheet date; income and expenses are translated at the
average rates of exchange prevailing during the quarter. Related translation
adjustments are reflected as a separate component of accumulated other
comprehensive loss. Foreign currency gains and losses resulting from
transactions are included in the consolidated results of operations.
Foreign currency exchange gains included in the company's operating results for
the three months ended March 31, 2005 totaled $1.0 million, compared to losses
of $0.6 million during the three months ended March 31, 2004. For the three
months ended March 31, 2005, the company recorded a negative non-cash foreign
currency translation adjustment of $21.6 million that decreased shareholders'
equity, compared to a negative non-cash foreign currency translation adjustment
of $3.7 million that decreased shareholders' equity in the three months ended
March 31, 2004. The three months ended March 31, 2005 were negatively impacted
by the effect of currency exchange rates, primarily the weakening of the Euro,
Polish Zloty and South African Rand relative to the U.S. Dollar, compared to
December 31, 2004.
Recent Accounting Pronouncements:
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an amendment
of ARB 43, Chapter 4." SFAS No. 151 requires certain inventory costs to be
recognized as current period expenses. SFAS No. 151 also provides guidance for
the allocation of fixed production costs. This standard is effective for
inventory costs incurred during fiscal years beginning after June 15, 2005.
Accordingly, the company will adopt this standard in 2006. The company has not
yet determined the impact, if any, SFAS No. 151 will have on its results of
operations, cash flows and financial position.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment." SFAS
No. 123R is a revision of SFAS No. 123, "Accounting for Stock-Based
Compensation," which supersedes Accounting Principles Board (APB) Opinion No.
25, "Accounting for Stock Issued to Employees" and amends SFAS No. 95,
"Statement of Cash Flows." Generally, the approach to accounting for share-
based payments in SFAS No. 123R is similar to the approach described in SFAS
No. 123. However, SFAS No. 123R requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the consolidated
statement of income based on their fair values. Pro forma disclosure is no
longer an alternative. In April 2005, the Securities and Exchange Commission
deferred the effective date of SFAS No. 123R until the beginning of the first
fiscal year beginning after June 15, 2005. Early adoption is permitted. The
company expects to adopt the provisions of SFAS No. 123R effective January 1,
2006.
SFAS No. 123R permits public companies to adopt its requirements using either
the "modified prospective" method or "modified retrospective" method. Under the
"modified prospective" method, compensation cost is recognized, beginning with
the effective date (a) based on the requirements of SFAS No. 123R for all share-
based payments granted after the effective date and (b) based on the
29.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
requirements of SFAS No. 123 for all awards granted to employees prior to the
effective date of SFAS No. 123R that remain unvested on the effective date. The
"modified retrospective" method includes the requirements of the "modified
prospective" method, but also permits entities to restate based on the amounts
previously recognized under SFAS No. 123 for purposes of pro forma disclosures
either all periods presented or prior interim periods of the year of adoption.
The company plans to adopt SFAS No. 123R using the "modified prospective"
method.
As permitted by SFAS No. 123, the company currently accounts for share-based
payments to employees using APB Opinion No. 25's intrinsic value method and, as
such, generally recognizes no compensation cost for employee stock options.
Accordingly, the adoption of SFAS No. 123R's fair value method will have an
impact on the company's results of operations, although it will have no impact
on the company's overall financial position. The impact of adoption of SFAS No.
123R cannot be predicted at this time because it will depend on levels of share-
based payments granted in the future. However, had the company adopted SFAS No.
123R in prior periods, the impact of that standard would have approximated the
impact of SFAS No. 123 as described in the disclosure of pro forma net income
and earnings per share in Note 1 to the company's consolidated financial
statements in the company's Annual Report on Form 10-K for the year ended
December 31, 2004. SFAS No. 123R also requires the benefits of tax deductions
in excess of recognized compensation cost to be reported as a financing cash
flow, rather than as an operating cash flow as required under current
literature. This requirement will reduce net operating cash flows and increase
net financing cash flows in periods after adoption. While the company cannot
estimate what those amounts will be in the future (because they depend on, among
other things, when employees exercise stock options), the amount of operating
cash flows recognized in prior periods for such excess tax deductions were
$3.1 million, $1.1 million and $0 in 2004, 2003 and 2002, respectively.
Critical Accounting Policies and Estimates:
The company's financial statements are prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the periods presented. The company reviews its critical accounting policies
throughout the year. The company has concluded that there have been no changes
to its critical accounting policies or estimates, as described in its Annual
Report on Form 10-K for the year ended December 31, 2004, during the three
months ended March 31, 2005.
Other:
On April 19, 2005, the company's board of directors declared a quarterly cash
dividend of $0.15 per share, payable on June 2, 2005 to shareholders of record
as of May 20, 2005. This will be the 332nd consecutive dividend paid on the
common stock of the company.
30.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
In May 2004, the company announced a plan to begin closing its three bearings
plants in Canton, Ohio. In June 2004, the company and the United Steelworkers of
America (union) began the effects bargaining process. In July 2004, the company
and the union agreed to enter into early formal negotiations over the current
labor contract, which expires in September 2005. As of the date of this report,
the company and the union are continuing to negotiate. If the company and the
union are unable to reach early agreement, the company may experience negative
effects, including the possible loss of future business due to uncertainty
concerning the company's labor situation.
Certain statements set forth in this document (including the company's
forecasts, beliefs and expectations) that are not historical in nature are
"forward-looking" statements within the meaning of the Private Securities
Litigation Reform Act of 1995. The company cautions readers that actual results
may differ materially from those projected or implied in forward-looking
statements made by or on behalf of the company due to a variety of important
factors, such as:
a) changes in world economic conditions, including additional adverse effects
from terrorism or hostilities. This includes, but is not limited to,
political risks associated with the potential instability of governments and
legal systems in countries in which the company or its customers conduct
business and significant changes in currency valuations.
b) the effects of fluctuations in customer demand on sales, product mix and
prices in the industries in which the company operates. This includes the
ability of the company to respond to the rapid improvements in the
industrial market, the effects of customer strikes, the impact of changes in
industrial and automotive business cycles and whether conditions of fair
trade continue in the U.S. market.
c) competitive factors, including changes in market penetration, increasing
price competition by existing or new foreign and domestic competitors, the
introduction of new products by existing and new competitors and new
technology that may impact the way the company's products are sold or
distributed.
d) changes in operating costs. This includes: the effect of changes in the
company's manufacturing processes; changes in costs associated with varying
levels of operations; higher cost and availability of raw materials and
energy; the company's ability to mitigate the impact of higher material
costs through surcharges and/or price increases; changes resulting from
inventory management and cost reduction initiatives and different levels of
customer demands; the effects of unplanned work stoppages; and changes in
the cost of labor and benefits.
e) the success of the company's operating plans, including its ability to
achieve the benefits from its manufacturing and administrative cost
reduction initiatives as well as its ongoing continuous improvement and
rationalization programs; and the ability of acquired companies to achieve
satisfactory operating results.
31.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
f) the company's ability to maintain appropriate relations with unions that
represent company associates in certain locations in order to avoid
disruptions of business.
g) the success of the company's plans concerning the transfer of bearing
production from Canton, including the possibility that the transfer of
production will not achieve the desired results, the possibility of
disruption in the supply of bearings during the process, and the outcome
of the company's discussions with the union that represents company
associates at the affected facilities.
h) unanticipated litigation, claims or assessments. This includes, but is not
limited to, claims or problems related to intellectual property, product
liability or warranty and environmental issues.
i) changes in worldwide financial markets, including interest rates, to the
extent they affect the company's ability to raise capital or increase the
company's cost of funds, have an impact on the overall performance of the
company's pension fund investments and/or cause changes in the economy
which affect customer demand.
Additional risks relating to the company's business, the industries in which the
company operates or the company's common stock may be described from time to
time in the company's filings with the SEC. All of these risk factors are
difficult to predict, are subject to material uncertainties that may affect
actual results and may be beyond the company's control.
Except as required by the federal securities laws, the company undertakes no
obligation to publicly update or revise any forward-looking statement, whether
as a result of new information, future events or otherwise.
32.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Refer to information appearing under the caption "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" on pages 17-31 of this Form 10-Q. Furthermore, a
discussion of market risk exposures is included in Part II,
Item 7A, "Quantitative and Qualitative Disclosure about Market
Risk," of the Company's 2004 Annual Report on Form 10-K. There
have been no material changes in reported market risk since the
inclusion of this discussion in the Company's 2004 Annual Report
on Form 10-K referenced above.
Item 4. Controls and Procedures
As of the end of the period covered by this report, the Company
carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's
principal executive officer and principal financial officer, of the
effectiveness of the design and operation of the Company's disclosure
controls and procedures pursuant to Exchange Act rule 13a-15(e).
Based upon that evaluation, the principal executive officer and
principal financial officer concluded that the Company's disclosure
controls and procedures were effective as of the end of the period
covered by this report. There have been no significant changes in
the Company's internal control over financial reporting that has
materially affected, or is reasonably likely to materially affect,
the Company's internal control over financial reporting during the
Company's most recent fiscal quarter.
33.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
The company is normally involved in various claims and legal actions
arising in the ordinary course of its business. In the opinion of
management, the ultimate disposition of these matters will not have a
material adverse effect on the company's consolidated financial
position or results of operations.
The company is currently in discussions with the State of Ohio
concerning a violation of Ohio air pollution control laws which was
discovered by the company and voluntarily disclosed to the State of
Ohio approximately eight years ago. Although no final settlement has
been reached, the company believes that the final settlement will not
be material to the company or have a material adverse effect on the
company's consolidated financial position or results of operations.
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer
Purchases of Equity Securities
(c) Issuer Purchases of Common Stock
The following table provides information about purchases by the company
during the quarter ended March 31, 2005 of its common stock.
Total Number Maximum
of Shares Number of
Purchased as Shares that
Part of May Yet Be
Publicly Purchased
Total Number Average Announced Under the
of Shares Price Paid Plans or Plans or
Period Purchased (1) per Share (2) Programs Programs
------ ------------- ------------- ------------ -----------
1/1/05-
1/31/05 2,106 $23.85 - -
2/1/05-
2/28/05 4,447 $25.46 - -
3/1/05-
3/31/05 2,614 $28.41 - -
------------- ------------- ------------ -----------
Total 9,167 $25.93 - -
============= ============= ============ ===========
(1) The company repurchases shares of its common stock that are owned
and tendered by employees to satisfy tax withholding obligations
on the vesting of restricted shares.
(2) The average price paid per share is calculated using the daily high
and low of the company's common stock as quoted on the New York
Stock Exchange at the time the employee tenders the shares.
34.
Item 4. Submission of Matters to a Vote of Security Holders
At the 2005 Annual Meeting of Shareholders of The Timken Company held
on April 19, 2005, the shareholders of the company elected the four
individuals set forth below as Directors in Class II to serve a term
of three years expiring at the Annual Meeting in 2008 (or until their
respective successors are elected and qualified).
Affirmative Withheld
------------- ----------
Phillip R. Cox 85,796,839 1,120,452
Robert W. Mahoney 82,267,462 4,649,829
Ward J. Timken, Jr. 84,782,928 2,134,363
Joseph F. Toot. Jr. 84,217,992 2,699,299
Shareholders approved The Timken Company Senior Executive Management
Performance Plan, as amended and restated as of February 1, 2005.
Affirmative Negative Abstain
----------- ---------- ----------
81,004,568 4,532,592 1,380,131
Item 6. Exhibits
11 Computation of Per Share Earnings
12 Computation of Ratio of Earnings to Fixed Charges
31.1 Certification of James W. Griffith, President and Chief
Executive Officer of The Timken Company, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Glenn A. Eisenberg, Executive Vice
President-Finance and Administration (principal financial
officer) of The Timken Company, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32 Certifications of James W. Griffith, President and Chief
Executive Officer, and Glenn A. Eisenberg, Executive Vice
President-Finance and Administration (principal financial
officer) of The Timken Company, pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
35.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
The Timken Company
_______________________________
Date May 10, 2005 BY /s/ James W. Griffith
________________________ ______________________________
James W. Griffith
President and Chief Executive Officer,
and Director
Date May 10, 2005 BY /s/ Glenn A. Eisenberg
________________________ _______________________________
Glenn A. Eisenberg
Executive Vice President - Finance and
Administration (Principal Financial Officer)